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The Smart Economy

Fri, Sep 4, 2009, 01:00

Creating a smart economy will take more than political promises. We consider the changes required – such as educational reform and promoting an entrepreneurial culture – while ensuring that in the rush to research we don’t abandon small business or the less well-off

WE DO not have an integrated plan for economic recovery. The Government is adopting a piecemeal approach. Consequently, it is likely that inconsistencies will arise between different policies. The central focus on the smart economy, for example, may not be consistent with the creation of full employment.

What if Nama doesn’t get the banks lending again: how are enterprise and the smart economy going to be financed? What if increased taxation discourages the wealth-creating sectors of the economy? Conflicts like these will be detrimental to job creation. How exactly can we create a smart economy and will it generate enough jobs?

History is full of examples of labour-displacing technology, especially in countries where wage costs became onerous. Long before the term “smart economy” was coined, economists had become aware of the vital role of technology in the production process. It was the miracle ingredient. Productivity increases were no longer the result of placing greater amounts of horse-power at the elbow of the worker but of improving the quality of the capital stock. There followed the important concept of human capital.

Workers were seen as providing skills and brain-power rather than labour. This view has altered traditional employer-employee relationships. The US is the world leader in technology partly because of the absence of “boundaries” between science and more applied forms of technology. In Europe, on the other hand, academic scientists are more reluctant to get their boots muddied in the market place.

The “new economy” thesis in the US extends an earlier debate which argued that economies develop in jumps as major scientific breakthroughs occur. Some – including Alan Greenspan – believe modern computer technology has led to an upward shift in productivity in the US; others are not convinced.

Countries like Japan copied existing technologies before they created their own. Clearly, a higher order of skills is required for the latter. This is presumably the stage which our government aspires to. Developing our own technologies will be even more important if foreign direct investment into Ireland slows down.

Suppose Ireland developed an efficient technology for generating wave or tidal power: we could not only sell the electricity but could also sell the technology to other countries (or protect it by patent if that is the preferred course). In this example the benefits would be multiplied by spectacular natural advantages. By reducing our dependence on imported fossil fuels we would be helping the balance of payments and benefiting the environment. But it all sounds very aspirational.

One commentator has described it as “smart pie in the sky”; another wonders if we really need “thousands of PhDs in white coats wandering around corridors”. The question is, how can it all be put into action? To use the jargon, what are the delivery systems?

The first point to be made is that it is very difficult for a government to drive the supplyside of an economy. Look at the awful mistakes made by centrally planned economies in the past. Most economists would argue that this area has to be left to private entrepreneurs responding to market signals.

The Government should only provide the intellectual infrastructure – education, broadband networks,legal protection, and so on. This is largely how it works in a country like the US where existing high-tech companies have their own huge research facilities. Because of scale and experience they can also outsource research to universities and keep an informed eye on progress.

Often research does not produce a viable technology and millions of dollars can be “wasted” so companies have to be large enough to carry these costs. Large US companies can also bear other risks associated with research, for example, the risk of being “beaten to the draw” by a rival institution.

The US is one of the few countries that can afford to do space research and this often produces spin-offs in other areas. America has a no-nonsense approach to research. In Ireland, on the other hand, there can be friction between scientists and entrepreneurs. Interpersonal issues often require skilled mediation. Instead of welcoming the recent research merger between UCD and TCD, other third-level institutions cried foul.

One academic observer described the arrangement as the start of a “civil war” between third-level institutions. It is not so easy for a small beginner like Ireland to become a smart economy. We acquired technology the easy way, ie by encouraging high-tech companies into the country, and this “coat-tailing” has probably held back the development of an indigenous technology culture.

Consequently there is a case for some form of government support, at least to get the ball rolling. At a time of fiscal stringency, however, it is unlikely the €8.2 billion earmarked for scientific research in the National Development Plan (NDP) 2007-2013 can now be afforded. There are “innovation funds” available and Forfás assists research and development. There are university/business incubators and a number of science bodies which probably need to be rationalised.

Science Foundation Ireland makes grants available under the NDP. It is not clear, however, that there is a wellarticulated delivery system and follow-up. One science body recently said it had no performance indicators for assessing whether government grants had been used successfully or not.

On the education front the situation is mixed. Failure rates in mathematical subjects need to be examined in detail, bearing in mind the existence of grade inflation. At the moment there are problems relating to inadequate supervision of teachers, relative underpayment of science teachers and researchers, the shortness of the school year, and so on.

In time we will probably acquire the scientists but that is only half the equation. The commercial or entrepreneurial side also has to be developed, though it is not clear how this will be accomplished. The ideal would be to combine both skills in the same person – the “scientist-entrepreneur” – but where can we find such exotic creatures? They are a rare breed.

Realistically, Ireland can only aspire to being a niche player. On paper, the area of wave and tidal power would seem to be a prime candidate. But doesn’t that mean other research projects would have to be dropped or scaled back? The reality is, in a small country like Ireland we can’t spread our effort too thinly.

We need to study the delivery systems in other countries which have transformed themselves into smart economies. What practical problems were encountered? What was the optimal role of government? How were scientific ideas changed into commercial realities?

Even if these practical difficulties can be surmounted, there remains the question of full employment. Will this be achievable?

Clearly, research work itself will be labour-intensive. But when the technology is up and running it is not so clear-cut. Highly skilled people will be in demand but they could form an elite group, having to be paid well above the average. Most of the more routine work would probably be outsourced to low-wage countries. This would drive down wages of “ordinary” workers, thus worsening inequality.

People who lack the opportunity to access third- and fourth-level education would not have good prospects in such an economy. Inequality would increase. In the US, for example, skilled people at the top of smart corporations can earn up to 500 times the average industrial wage.

Developing a smart economy will not be easy. Neither will it be a panacea. It is necessary to examine the broader social implications of such a change.

Michael Casey is a former chief economist with the Central Bank and a former IMF board member